A cupcake store is located in a mall and in the only cupcake siore in l The demu

Question

A cupcake store is located in a mall and in the only cupcake siore in l The demund schodule So cupcakes iper denen) is given in the table below. Ifthe marginal cost te pnoduce a donee cupcakes is 54 per anit $7 What proe should the cupcake store charge? tf the fixed cost fr he firm $100 per day, how much profit will the fan one day? hat is the price elasticity of demand atl the optimal price qantity combination(se the nest lower price level as the second peint in your calculatin? ls the formula for finding the correct level of eupu inár middlef 74.-tuGor dNetethm eqeation should read (P MCOP

Explanation / Answer

From the demand schedule we first find the total revenue which is Price x Quantity and then find marginal revenue which is (TRn - TRn-1)/(Qn - Qn-1). This gives us the following table

Now MC = $4 and MR is greater and closest to MC at Q = 100. Thus, firm should produce 100 units. The price is $6 per unit

At this combination profit = TR - TC = (100*6) - (100 + 4*100) = $100 per day

Price elasticity using mid point is given by

Ed = (Q2 – Q1) / [(Q2 + Q1)/2] / (P2 – P1) / [(P2 + P1)/2]

= (160 - 100)/((160 + 100)/2) divided by (5 - 6)/((5 + 6)/2)

= -2.54

Now use P - MC / P = 6 - 4/6 = 0.33 and 1/2.54 = 0.39. Hence (P - MC)/P is less than 1/|ed|

Quantity Price TR MR MC 3 12 36 12.00 4 7 11 77 10.25 4 12 10 120 8.60 4 20 9 180 7.50 4 35 8 280 6.67 4 60 7 420 5.60 4 100 6 600 4.50 4 160 5 800 3.33 4 250 4 1000 2.22 4

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